Arithmetic

A few weeks ago, former President Clinton scored political points while criticizing the economic plan of Gov. Mitt Romney. He touted the Federal budget surpluses during the final years of his presidency. He went on to say he was able to balance the budget by simple arithmetic. He also invoked the simple arithmetic principle to argue that Gov. Romney’s plan didn’t add up and would result in a large tax increase on middle class Americans.

The truth is that neither Gov. Romney nor President Obama’s plans pass the arithmetic test. A detailed analysis of their plans is far beyond the scope if this article, so I’ll briefly summarize.

The highlights of Gov. Romney’s plan:

Cut tax rates by 20% for individuals and lower the corporate rate to 25%

Have preferential rates for interest, dividends and capital gains

Eliminate loopholes and limit certain deductions for higher income taxpayers

The criticism of Romney’s arithmetic is there aren’t enough loopholes to close which will offset the reduced revenue from the lower tax rates. Deductions would also have to be limited for lower income taxpayers to make the numbers work.

The main point of President Obama’s plan:

Increase the tax rates for people making over $250,000

Eliminate the preferential rate for dividends and increase the capital gains rate

These changes are estimated to raise an additional $70 billion in annual tax revenues.

The arithmetic doesn’t work for either of these plans to balance the budget. For the 2012 budget year, the federal government overspent by $1.1 trillion, and the total national debt has exceeded $16 trillion. Since the government spends approximately $3.5 trillion each year, it’s a monumental task to close a $1.1 trillion deficit.

The U.S. Treasury collects approximately $2.2 trillion in income tax revenue each year. To balance the budget under the Romney plan, all current deductions would need to be cut in half to raise another $1 trillion. Deductions would have to be limited even more if the tax rates are reduced. The Obama plan is no better. Even if his tax changes were implemented, he’s about $1 trillion short to balance the budget. By simple arithmetic, the numbers don’t add up… for Romney or Obama.

We can’t tax our way out of the hole we are in. We must cut spending in order to balance the budget. This is not Washington semantics for cuts by reducing the rate of growth or cutting the amount you hoped to spend. It means actually spending less than the $3.5 trillion we spent last year.

On this front, I give the edge to Gov. Romney. You or I may not agree with his proposals or priorities, but at least he’s willing to talk about cutting federal expenditures. He was criticized and ridiculed after the first Presidential debate for trying to kill Big Bird, because he advocated ending the federal subsidy to the Public Broadcasting Service. He has also been willing to tackle the “third rail” of politics – Medicare and Social Security.

In contrast, I can’t think of one significant cut in federal spending proposed by President Obama. Counting money which would have been spent for the war in Iraq but isn’t going to be spent doesn’t count in my book. It’s like saying you cut your spending by $5,000 for the vacation you didn’t take. Furthermore, the budget deficit for 2013 will still be over $1 trillion without any spending for Iraq. Instead of talking about spending cuts, the President is pushing for more “investments” (aka spending) for teachers and infrastructure. These may be good things, but it doesn’t address how to balance the budget, and taxing the rich more isn’t going to close the gap.

Politicians are very good at using sound bites and obscuring the truth. President Clinton was right… balancing the budget is simply a matter of arithmetic. In this case, both candidates (and most members of Congress) probably need a remedial math class.